Analysis of China’s coal price trends in 2009

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In 2008, China’s coal industry experienced significant fluctuations; from January to August, the coal market was in a state of tight supply, and coal prices rose rapidly. After the Olympics, as the production of industrial products that rely heavily on coal declined rapidly, coal prices also dropped significantly. First, the prices of coking coal and coke dropped sharply, followed by a rapid decline in the prices of thermal coal over several weeks; it was not until the end of 2008 that coal prices stopped falling and stabilized. At the coal ordering conference held in Fuzhou in late December 2008, differences between coal producers and power generators regarding the prices for key coal contracts proved difficult to resolve; they had differing views on the trend of coal prices in 2009, which ultimately led to a deadlock in the negotiations over those key coal contracts. So, what was the trend in coal prices in 2009? As is well known, coal prices are determined by both its production costs and the market. Therefore, analyzing price trends should start from these two aspects. I. Analysis of production costs The production costs of coal mainly include material costs, depreciation expenses, maintenance costs, electricity costs, employee salaries and benefits, safety expenses, policy-related expenditures, and others. In recent years, as labor costs, material prices, electricity rates have risen and policy-related expenditures have increased, coal costs have climbed rapidly. In 2008, the unit cost of raw coal for large-scale coal enterprises across the country reached 330 yuan per ton, more than triple the 106 yuan per ton in 2001 (with an average selling price of 362 yuan per ton, 1.4 times higher than the 151 yuan per ton in 2001). In 2009, the main factors contributing to the rise in coal production costs included value-added tax reforms, changes in the taxation of coal resources, continuously rising labor costs, and increasing environmental costs. 1. The VAT reform restores the VAT rate on coal products from 13% to 17%, allowing companies to deduct the VAT included in newly purchased equipment. If the increased VAT cannot or cannot be fully passed on to downstream companies, it will reduce the net profits of coal enterprises. 2. Reforms to the coal resource tax collection system are expected to be implemented within this year. The coal resource tax will be changed from a volume-based system to a price-based one, which may lead to a certain increase in coal production costs. In accordance with the Overall Implementation Plan for the Pilot Program on Policies and Measures for the Sustainable Development of the Coal Industry in Shanxi Province, it is required to levy (collect) a fund for the sustainable development of the coal industry, to establish a system for guarantees related to environmental remediation at mines, to manage more effectively the funds associated with the conversion of coal mines to other uses, and to continuously improve the cost accounting practices of coal production enterprises. These policies were put into effect starting in 2007, but were actually fully implemented in 2008. As a result, the production cost of thermal coal increases by 20–45 yuan per ton, the cost of coking coal rises by 30–55 yuan per ton, and the cost of anthracite increases by 25–55 yuan per ton. As the positive effects of these policies become apparent, they will also be introduced in other provinces and cities, thereby increasing the coal production costs across the country. Furthermore, with the development of the economy and society and the improvement of people’s awareness, the environmental and labor costs associated with coal production are expected to rise over a long period of time. II. Market Analysis The coal market reflects the dynamic relationship between coal supply and coal demand. (1) Coal supply: In 2009, the capacity for coal supply is set to increase and improve, but due to the influence of local policies and safety regulations, there will be unevenness in coal supply over time. 1. Improved coal supply capacity: The favorable conditions in the coal market over the years have encouraged private capital to flow into this industry, resulting in continuous and rapid growth in investment in fixed assets for coal mining and processing. The coal mines that began construction in previous years have been put into operation one after another, with some of their production capacity coming online in 2009, further enhancing the coal supply capacity. A decline in demand or slow growth in demand further exacerbates the oversupply of coal. 2. The unevenness in coal supply over time, along with the uncertainty arising from local policies, affects the coal market. Currently, the country’s annual coal production is around 2.75 billion tons; of this, production from state-owned key coal mines accounts for 52%, state-owned local coal mines account for 14%, and township coal mines account for 34%. The production of key state-owned coal mines remains stable and is largely unaffected by local policies. The production of state-owned local and township coal mines is greatly influenced by local policies, resulting in intermittent production patterns. This is especially true for township coal mines, whose operations are heavily affected by local policies; some of these mines remain shut down for more than half of the year. Therefore, the coal production that can be supplied stably actually accounts for only about 70%-80% of the total production, while the remaining 20%-30% of coal supply is characterized by seasonality. Once the local authorities **allow them to produce, they will go all out to organize production, thereby affecting the coal market. A very significant reason for the recent stabilization of coal prices after a decline is the widespread shutdown of local coal mines, which has led to a reduction in the overall supply. 3. The level of security in coal supply will be further improved. The economic crisis and an oversupply of coal will accelerate the process of survival of the fittest within the industry; **this favorable situation will also be utilized to advance structural adjustments in the industry. Some enterprises with advanced management practices and strong capabilities will grow rapidly through mergers and reorganizations. In 2009, the concentration of coal production in China will increase further, as well as the proportion of output generated by key state-owned coal enterprises. At the same time, coal mine closures and restructuring, as well as the consolidation of coal resources, have been underway for over three years; overall, the safety capabilities of coal mines have improved significantly. The security of energy supply in our country has been enhanced, and the stable production of coal will continue to increase. (II) Coal demand: 1. Production in the key coal-using industries declined on a month-on-month basis, leading to a reduction in coal consumption. Whether total coal demand across the country increased or decreased in 2009 depended on the macroeconomic situation. Since September 2008, affected by the financial crisis, the growth rate of the national economy has declined. The production growth rates in key coal-consuming industries such as thermal power, metallurgy, building materials, and chemicals have continued to fall, with some even experiencing negative growth. Despite the large production capacity of the coal-dominated industry, utilization rates are generally low, and overall coal demand continues to decline on a month-on-month basis. 2. Outdated production methods will gradually withdraw from the market during this economic crisis, and new progress will be made in energy conservation and consumption reduction. Thanks to the joint efforts of all parties, significant achievements have been made in energy conservation and emission reduction in our country. Following a 3% decline in energy consumption per unit of GDP in our country last year, it dropped by another 3.46% in the first three quarters of 2008. In 2009, driven by market forces, the economic crisis will accelerate the process of phasing out outdated technologies in various industries. A number of enterprises or production lines that consume large amounts of energy and cause significant pollution will gradually withdraw from the market. This will lead to further optimization of China’s economic structure and an improvement in its pattern of economic growth, with the result being a faster decline in energy consumption per unit of GDP. The impact on our country’s economic development will be positive and long-term. However, at the same time, it is a reality that the slowdown or even decline in the overall demand for energy will have an impact on the energy industry, and such impacts will become apparent in 2009 and the years that follow. III. Conclusion The trend in coal prices in 2009 was the result of the combined effect of various factors. Among them, the macroeconomy is the decisive factor affecting the coal market. The slowdown or even decline in the total coal consumption had a negative impact on the coal industry in 2009 ； At the same time, the continuously rising costs of coal production determine a long-term upward trend in coal prices. The uncertainties affecting coal supply are more numerous and complex. It is preliminarily estimated that next year, **greater oversight will be exerted on the coal industry in terms of coal mine safety improvements, coal resource consolidation, mergers and reorganizations, as well as volume control, which will thus affect coal supply. Specifically, in the first quarter of 2009, due to holidays and **, many local coal mines were shut down or operating at reduced capacity, resulting in a relatively tight supply of coal; as a result, coal prices remained high ； Entering the second quarter, as local coal mines resume production one after another, coal supply increases. Coupled with the fact that this is a off-season for coal, coal prices are set to enter a new phase of decline ； If the macroeconomy continues to deteriorate and measures to control total coal production are not stringent enough, the price of coal may still keep falling; it is possible that coal companies will once again operate in a situation of slim profits, with some of those companies with high production costs facing losses ； If the economic stimulus package works, the coal market may start to recover from July onwards. Currently, the industry widely believes that even if coal prices decline next year, it should be possible to maintain the price levels seen at the end of 2007.